Adeno-associated virus type 2 (AAV) is a non-pathogenic, single-stranded DNA virus which is being developed as a gene therapy vector. The Rep68 and Rep78 proteins (Rep68/78) of AAV possess DNA-binding, helicase and endonuclease (nicking) activities, which appear to be involved in both AAV replication and the preferential integration of the AAV genome into a region within the q arm of human of human chromosome 19 (the only example of site-specific integration in a mammalian virus system). During AAV replication, Rep68/78 makes a site- and strand-specific nick at the terminal resolution site (trs) within the stem of the hairpin structure formed by the inverted terminal repeats (ITRs) of AAV DNA. This nicking involves the covalent attachment of Rep68/78 to the trs via a phosphate-tyrosine linkage. To test the hypothesis that the helicase activity is required for the nicking activity, we assayed the nicking activity of mutated Rep proteins on a hairpin substrate in which the trs is single-stranded (SS-hairpin); as opposed to the standard substrate with a duplex trs. Several mutant proteins, which were endonuclease-negative on the duplex hairpin, had nearly wild-type nicking activity on the SS-hairpin. Truncation analysis revealed that the SS-hairpin endonuclease function was contained within the first 200 amino acids, part of the region which is identical in Rep68 and Rep78. We mutated each tyrosine within the first 200 amino acids to phenylalanine. Only mutation of tyrosine 156 resulted in a protein incapable of covalent attachment and trs endonuclease activity on the SS-hairpin, suggesting that tyrosine 156 is part of the endonuclease active site. Rep68/78 nicking occurs within a GTTGG motif, 11-16 bases from the imperfectly repeating [GCTC]/[GAGC] motif which constitutes the primary Rep recognition sequence (RRS). Both motifs are found within the AAV ITRs and the chromosome 19 integration locus (AAVS1). A linear, double-stranded segment of DNA, containing these two motifs, has previously been shown to function as a substrate for the Rep68/78 endonuclease activity. When we mutated the RRS to a sequence, which is no longer recognized by Rep68/78, the substrate could no longer be cleaved. This is the first direct demonstration that the RRS is necessary for Rep68/78 nicking activity on a double-stranded substrate. Mutation of the GTTGG motif could also eliminate cleavage, as reported previously. Rep78 nicks the RRS/trs-containing site from AAVS1 about half as well as the linear form of the ITR sequence. Eighteen other RRS-containing sequences within the human genome are not cleaved by Rep78. These sequences lack a nearby GTTGG motif. These results may help to explain the specificity of AAV integration.